Aug 4, 2011
Executives
Chris Weilminster - Senior Vice President of Leasing Andrew Blocher - Chief Financial Officer, Senior Vice President and Treasurer Dawn Becker - Chief Operating Officer, Executive Vice President, General Counsel, Secretary and Member of Executive Investment Committee Cooper Campbell - Jeffrey Berkes - Chief Investment Officer, Executive Vice President and President of Federal Realty West Coast Donald Wood - Chief Executive Officer, President, Trustee and Chairman of Executive Investment Committee
Analysts
Steve Sakwa - ISI Group Inc. Christy McElroy - UBS Investment Bank Jeffrey Donnelly - Wells Fargo Securities, LLC Richard Moore - RBC Capital Markets, LLC Laura Clark - Green Street Advisors, Inc.
Alexander Goldfarb - Sandler O'Neill + Partners, L.P. Paul Morgan - Morgan Stanley R.J.
Milligan - Raymond James & Associates, Inc. Nathan Isbee - Stifel, Nicolaus & Co., Inc.
Vincent Chao - Deutsche Bank AG Michael Mueller - JP Morgan Chase & Co Craig Schmidt - BofA Merrill Lynch
Operator
Good morning, and welcome to the Second Quarter 2011 Federal Realty Investment Trust Earnings Conference Call. [Operator Instructions] This conference is being recorded.
If you have any objections, you may disconnect at this time. I would like to introduce the conference leader, Mr.
Cooper Campbell. Sir, you may begin.
Cooper Campbell
Good morning. I'd like to thank everyone for joining us today for Federal Realty's Second Quarter 2011 Earnings Conference Call.
Joining me on the call today are Don Wood, Dawn Becker, Andy Blocher, Jeff Berkes and Chris Weilminster. These, and other members of our management team, are available to take your questions at the conclusion of our prepared remarks.
Our second quarter 2011 supplemental disclosure package provides a significant amount of valuable information with respect to the trust's operating and financial performance. This document is currently available on our website.
Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results.
Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information contained in our forward-looking statements, and we can give no assurance that these expectations will be attained. Risks inherent in these assumptions include, but are not limited to, future economic conditions including interest rates, real estate conditions and the risks and costs of construction.
The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. I'll now turn the call over to Don Wood to begin our discussion of our second quarter results.
Don?
Donald Wood
Thanks, Coop, and good morning, everyone. At $1.02 of FFO per share reported during the second quarter compared with $0.98 last year, we're very pleased with our operating performance thus far in 2011.
That bodes well for the rest of the year, as I'll touch on in a minute. The reported FFO per share would have been $0.03 higher but for the accounting requirement to treat over $2 million of interest income that we received in the quarter as a gain reported in discontinued operations and, therefore, not part of FFO.
That interest income represented past earnings on our Norwalk, Connecticut loan to a Shopping Center development partner that we thought was uncollectible in the depths of the recession. Turns out it was collectible, as a new capital partner brought us current.
That's a good sign for the overall commercial real estate development market and was certainly good for Federal. Not only was FFO per share strong but so is our internal growth at 1.5%, excluding redevelopment and 1.6% including it.
What's particularly noteworthy given the amount of space that's out of service is developments in our increasingly full pipeline gear up. Lease rollover growth on comparable spaces was solid at 6% on a cash basis and 16% straight-line.
In all, we signed 86 new or renewal leases for a total of 370,000 feet at average first year cash rents of $28.21 compared with $26.64 for the last year of the expiring lease. A note new grocery deal to replace an underperforming Safeway at Westgate Mall in Northern California and a strong L.A.
Fitness deal replacing our last remaining Circuit City box at Quince Orchard Shopping Center underpin the quarter. We did report a decrease in occupancy but that was expected given the 100,000 square feet of Borders and Blockbuster closings that were inevitable.
As I said in my remarks last quarter, the closing of 3 Borders locations and all of our remaining Blockbuster Video stores in 2Q couldn't help but bring down occupancy at June 30. We came in at 93.4% leased, down 40 bps from the 93.8% that we reported in the first quarter, all due to those retailers.
I also said last quarter that I believe that June 30 would likely be at or near the low watermark for the unleased space in the portfolio and that we had more upside potential than downside risks at this point. That's still the case.
I think you'll start to see increases to the lease percentage by year end. On Borders locations, Rockville Pike in Chevy Chase, Maryland, Santana Row and Old Town, Los Gatos, California are all A+ locations and won't be hard to re-lease at stronger rents than Borders was paying.
We're pretty far down the road in tenant discussions on all of them. Our final Borders location on Philadelphia's Main Line in Wynnewood, Pennsylvania will also close in the next couple of months and we need to get moving on replacing them, but also expect strong interest there.
Operationally, the second quarter was quite strong and that bodes well for the guidance we're going to provide for the rest of the year. Let's talk about that for a minute.
We've increased -- we raised our guidance, our 2011 guidance, to a range of $3.99 to $4.04 from the existing guidance of $3.95 to $4.02. And with that, we'll also raise our dividend rate for the 44th consecutive year.
I couldn't be more thrilled than to be able to raise guidance in the dividend based primarily on favorable results and trends in tenant leasing and reduced bad debt exposure. Andy will go through our rationale and more specifics on that in a few minutes.
But the point that I think is critical for investors to understand is that the increase in earnings guidance is possible despite very heavy investment and acquisition and development projects that hit the current P&L for the benefit of future periods. Let me explain.
For the last couple of years with the emphasis primarily on maintaining tenancy and trying to figure out where future rents were going to fallout, it's been hard to make developments and redevelopments pencil. And as you know, new acquisition opportunities that made any financial sense have been few and far between.
It's been particularly hard to deploy capital but that's changing a bit, particularly on the development side, and we currently got a lot in the pipeline. For illustrative purposes, let's assume that Federal reports an even $4 per share of FFO in 2011, which by the way would be an all-time record.
On its face, that would compare favorably to the record $3.88 that we reported last year, 3% growth, even though last year was helped by nearly $0.05 per share of Home Depot lease termination fees that we've talked about ad nauseaum for the past 5 quarters. If you dig a little deeper, you'd see that our current results include lots of hits to the P&L, reflecting the dramatic increase in productive acquisition and development activity in 2011 versus 2010.
The overall improvement in the commercial real estate landscape in strong locations has allowed us to make financial sense of future projects like Assembly Square, like Mid-Pike Plaza, the de-malling of Willow Lawn in Richmond and a residential development at Santana Row. All of those development projects have either broken ground or will shortly and necessitate the requisite tenant downtime demolition and our expensive marketing initiatives to get them properly established.
Expensed acquisition costs like those at Tower Shops early in the year and a bunch more of the potential acquisition in Southern California hit us today but don't benefit us until the future. Also, between the expensed acquisition costs, the dramatically increased marketing costs in Assembly, Mid-Pike, Santana Residential and others, along with demo costs and lost rent at projects like Willow Lawn and Bala Cynwyd hit or will hit FFO for the quarter and the full year by $0.02 and $0.06, respectively, more than the comparable 2010 periods.
Yet despite this, we're still reporting FFO growth that takes us to record absolute numbers. 2012 will still include heavy upfront costs and as Mid-Pike and Assembly get under way but the future looks very bright to us.
Finally, let me bring you up to speed on where we're deploying capital these days. At Santana Row, leasing is underway on our $34 million, 108-unit luxury rental building, and our expected 7% yield will more likely be an 8%, maybe even a 9%, at the end of the day.
Residential rents are that strong at Santana. Earlier in the week, our board approved a new $70 million investment in the next 216 residential units there at an expected stabilized yield of 7%.
After both of those projects are complete, we still hope to build an additional 150 or so apartments as well as an additional 80,000 square feet of retail and 200,000 square feet of office GLA at Santana. We would hope to have Santana Row nearly fully built out in the next 4 years, market conditions permitting of course.
In addition, we're close to approving another project for an additional 132-unit residential building, costing an estimated $30 million to $34 million at Congressional Plaza in Rockville, on land adjacent to our headquarters. Progress at Assembly Road continues on all fronts with T-Stop bids expected back shortly.
I think actually August 10 is when they're due back in. We hope to announce a strong theater deal as our first signed lease in the coming months, and we expect to be able to announce cost, yield and timing expectations also in the coming months.
For preliminary planning purposes though, assume the first phase requiring $120 million to $130 million from Federal, not including of course AvalonBay's apartment investment. Similarly, planning work at Mid-Pike continues unabated.
We'll have to come up with a name for that project before long, with a first phase construction start plan for about 1 year from now. We were refining cost, yield and timing assumptions now, but again, for planning purposes, assume a first phase capital requirement of $225 million to $250 million.
Lots of other redevelopment projects either underway, like Willow Lawn and Bala Cynwyd or in the planning stages, but it is certainly clear that we've got a strong pipeline of value creative opportunities that certainly depress accounting earnings in the short term, but add long-term, strong long-term value to this portfolio. On the acquisition front, just a few Ts to cross and Is to dot before we acquire a controlling interest in the Southern California retail center called Plaza El Segundo, along with an adjacent retail development opportunity.
Plaza El Segundo and a redevelopment parcel make up 45 acres at the corner of Rosecrans and Sepulveda Boulevard in El Segundo, California and currently comprise 380,000 square feet of great retail anchored by tenants like Whole Foods, Anthropology and coming soon, H&M. I can't really provide more specifics at this point because we're not fully there yet on the deal, but the prospect of a West Coast presence that includes such icons as Santana Row, Third Street Promenade, Westgate Mall and Plaza El Segundo, very exciting to us.
So that's it for my prepared remarks. We're really happy with the way the portfolio is performing and with our potential to grow and create more value.
Things are certainly not great in every shopping center and every market. And frankly, I can't remember a time when there's been as much separation as there is today in the outlook of specific retail destinations.
Location and a proven track record doesn't take a backseat to anything. Look forward to answering your questions following Andy's remarks.
Andrew Blocher
Thanks, Don. Good morning, everyone.
I'll put a little finer point in our results, talk about our recent line to credit recast, discuss the increase in the dividend and then provide a few comments on our improved guidance. Before doing that, I wanted to point to our expanded redevelopment disclosure in the supplement.
We've added clarity in a few of the bigger projects that Don discussed to stabilize after 2012, specifically Assembly Row and the new residential project at Santana Row. These projects have been approved internally and are being actively pursued by the Trust.
We will add additional larger projects as we work through the approval process and these will be an addition to a regular flow of smaller redevelopments in those out-years as well. We believe this disclosure provides a better roadmap for modeling future value creation for the Trust.
Turning to results. Rental income increased 2.6% from last year second quarter coming from the core same-center portfolio from a redevelopment property, specifically Hampden Lane in Bethesda, 300 Santana Row and Escondido and also from our acquisitions of Huntington Square and Tower Shops.
We also saw a pretty significant uptick in percentage rent this quarter as a result of better sales performance from a number of tenants, specifically at Santana, Bethesda and Shirlington. This is a great demonstration of how the economy isn't hitting all retail equally.
And the highest quality locations, while not immune, certainly continue to demonstrate their strength. We expect this trend to continue.
Other property income remained soft on a comparative basis due to lower lease term fees. Comparisons on a year-to-date basis are very tough as other property income is down over $4 million to a level half of our year-to-date 2010 result.
Recall, that we do include lease termination fees in our same-center property operating income comparisons. So that was a drag on the same-store growth of positive 1.5%, excluding redevelopment and positive 1.6%, including redevelopment that we reported in the quarter.
X the lease termination fees, our same-store NOI growth would have been 2.3% for the quarter and 2.7% on a year-to-date basis. Rental expenses were essentially flat as we recorded $1.4 million less in bad debt expense versus second quarter 2010.
Bad debt was at the lowest level we've seen since 2007 with no significant new tenant additions to our allowance and collections from a number of tenants that we had previously deemed uncollectible. In addition, rental expense benefited from the buy-outted [ph] ground leases under Bethesda Row and Pentagon in late 2010.
A portion of this benefit is offset by higher interest expense when you get to FFO. As Don discussed, these rental expense improvements were offset by increased demolition costs, as well as increased marketing expenses at Assembly.
Interest expense declined $1.5 million versus second quarter tab, benefiting from a 60-basis-point year-over-year decline in weighted average rate, partially offset by higher weighted average balances. Capital expenditures in the quarter included the retirement of $37 million of higher cost mortgage debt at a 6.8% weighted average rate on Federal Plaza in Tyson Station.
An additional redevelopment spending at 108-unit residential building at Santana Row and a variety of other redevelopment projects, which were funded with accommodation of additional line usage and equity issued through the ATM. Turning to balance sheet for a moment.
We issued another $42.2 million of equity under the ATM at a net price of $85.51 per share in the quarter, bringing our total for the year to $90.1 million. We continue to believe in maintaining a consistent approach to debt versus equity to keep our balance sheet metrics in line.
In early July, we recast our expiring $300 million credit facility with the new 4-year $400 million credit facility with a 1-year extension option. The quality of Federal Realty's property, strategy and management drove $700 million of demand, and this significant oversubscription allowed us to tighten pricing to LIBOR plus 115 basis points at our Baa 1 BBB+ rating.
This pricing represents a new tight in the recent REIT market as demonstrated by pricing levels for us at BBB+, which were equal to or through A- minus pricing levels for high-quality REIT deals that had been executed in the prior month. With no additional debt maturities until mid- 2012, enviable credit metrics and significant debt capacity, we remain in great shape to fund appropriate acquisition, redevelopment and development activities through both a fixed income and equity markets at attractive pricing levels.
Based on the quality of our results, our improving outlook and the strength of our balance sheet, our Board of Trustees voted to raise the quarterly dividend by $0.02 this year as opposed to the $0.01 that we raised in both '09 and '10. 2011 represents the 44th consecutive year that Federal Realty has been able to raise the dividend, a record in the REIT sector and amongst the longest such streaks of all publicly traded companies in the United States.
We've raised it every year since 1967. We've always paid it in cash, and our dividend record is certainly a point of significant pride for our employees, management and our Board.
I think this record is the greatest indicator of the quality of what we own, the dedicated focus on how we operate it and the long-term consistency that comes with our disciplined approach. Finally, we raised our 2011 FFO per share guidance from $3.95 to $4.02 to a new range of $3.99 to $4.04 based on our strong performance and improving outlook.
Some key points to note in our improved guidance include: despite the increased vacancy in the portfolio, we're calling for 2011 same-center property operating income growth in the 1% to 1.5% range, which includes a year-over-year decline in lease termination fees of $5 million and over $2 million more in demolition costs and marketing expenses associated with development activities at Santana Row, Mid-Pike, as well as a slew of other smaller pre-development projects in the same center pool. These decreases will be more than offset by increases in minimum, a percentage rent coming from our same-center pool redevelopments and acquisitions.
We're calling for $1 million increase in G&A. The change relative to the $0.5 million we talked about in last quarter's guidance comes from increased payroll associated with additions to our West Coast team, Assembly Row and Mid-Pike teams, net of capitalization.
With increased use of ATM to permanently fund our acquisition and development expenditures, the term out a portion of our line of credit as well as a credit facility recast to favorable rates, we're looking at about a $4 million improvement in year-over-year net interest expense. The portion of the savings in interest expense associated with the ATM usage relative to the line is offset by an increase in share count.
We're calling for 1 million more shares in our 2011 weighted average share count versus 2010, predominantly associated with the ATM. Finally, 2011 comparative results will include a $3 million year-over-year benefit associated with the early extinguishment of debt, largely coming from the early termination of our term loan in 2010.
To sum it all up, we produced record quarterly results based on strong same center operations. We increased our full year guidance.
We raised our dividend for the 44th consecutive year and we're gearing up our development and redevelopment pipelines to enhance future growth. Operator, we'll now turn the call over to questions.
Operator
[Operator Instructions] The first question comes from the line of Jeff Spector with BAML.
Craig Schmidt - BofA Merrill Lynch
It's actually Craig Schmidt. I had a question.
Regarding the theater that's going -- that may go in Assembly Row, isn't there a theater in that area right now?
Donald Wood
There's not, Craig. There had been, but that's been closed for a number of years.
There's [indiscernible] now. It's a big need.
Craig Schmidt - BofA Merrill Lynch
Super. Now that sounds like a great first step.
And also, on your supplemental Page 14, you list about 10 pad-site opportunities. What would it take to start moving forward on those opportunities as opposed to being on a list?
Donald Wood
Yes. It's a number of things and everyone, as you know, is different.
Entitlement is always part of the required permits. We're able to start on a number of them right now like the Bala Cynwyd stuff that's underway.
We're pushing like crazy from the development side to make sure that we've got all the development pieces. At the same time, leasing is going out there and trying to pre-lease all.
So as those 2 things come together, these things tend to hit. You'll clearly see more increasing activity in '12 and '13 as a result of those things coming off the list.
But the timing's a little hard to predict because of those 2 factors.
Craig Schmidt - BofA Merrill Lynch
Great, and then just given the pleasant surprise regarding bad debts, is there any more out there? Or is that a sort of a one-time positive hit?
Donald Wood
It's so funny. It's a great question.
I mean, it's a big question that we got into in terms of raising the guidance for the rest of the year. I think the rest of the year should be clean.
I think what we see is a clean set up. Now what's going on this week and last week in the markets and how much this affects the world going into 2012 and further is obviously anybody's guess, and that's certainly scary.
But everything that we see -- I mean, the reason we raised the guidance is I saw a strength from a bad debt perspective in every market we're doing business in, Craig. I saw it in California.
I saw it in Philly. I saw it in Washington and saw it in Boston.
And so when it's that broad-based, I got comfortable with raising the guidance.
Andrew Blocher
Yes. And if I could just add to that, Craig.
I mean, based on what Don said, that's why there's still a $0.05 range, too. So depending on the outcome, is it terminated where you show up in that range.
Operator
Your next question comes from the line of Paul Morgan with Morgan Stanley.
Paul Morgan - Morgan Stanley
On Assembly Row, appreciate all of the kind of extra disclosure you have on Page 14. But on Assembly Row, now I have to hit you on it.
So you had a ROI of 5% to 7% there, which is a relatively wide range. Can you talk about kind of the factors that would drive you up or down from there that you could identify now?
Donald Wood
Yes, yes, there's a couple of things. The single biggest piece of good news is that theater deal, basically being negotiated though now fully documented at this point and that being a great anchor in terms of the rental stream.
Now on the rest, it's going to be a combination of outlets, rent-based tenants, some service tenants and restaurants. There is more unknown, if you will, about the outlet piece than there is about the restaurant piece.
And so that range, those conversations, as we start getting into them, how many of them are percentage rent deals, how many of them have unnatural brakes, all that stuff provides that level of uncertainty at this point, and that's what you should expect more, something more concrete over the next year, basically. But that's not something in 1.5 month or 2 months, I'm going to be able to -- okay, going to 6.1 months, something like that.
So that's why we give that range. And you're right, it's wide.
Paul Morgan - Morgan Stanley
Okay. And then on the -- I mean, I know you can't give much more detail on El Segundo, but I mean, there's been some publicized deals of kind of similar type assets that people talk about, very low cap rates and just kind of in the context of this acquisition how you're feeling about pricing and kind of what makes this special versus sort of paying a kind of a very low cap rate or I guess your color on the way you're looking at acquisitions in the context of this deal.
Donald Wood
I'll give you a little bit. I think I feel a little bit like Joe Girardi being -- saying, "I can't tell you too much about Phil Hughes, and I'm not going to really answer too many questions on it."
And then the next set of questions are about Phil Hughes. But with respect to plans to El Segundo, I mean, look, if we get this deal done, it's expensive.
This is A+ real estate. It's expensive.
There is -- it's really the first one that we've looked at. We've said, "You know what, we will really stretch on this thing to pay up."
Because if you know this location, if you know the demos and the trends in this part of Southern California, you know it's really strong. So we certainly want it, and Jeff can chime in here.
Anything else that we've looked at that has this type of presence, and there are very, very few of them, going to go for a very low cap rate, there's is no doubt about it. But I really can't get into that deal more than at this point, more than I can -- to say more than that because we want to get it finished.
Jeffrey Berkes
Okay, I don't have much to add to that Don. I mean, Paul, I think you know that the market right now for A-quality shopping centers is being driven by institutional buyers, whether it be a pension fund or an insurance company.
And yes, I guess when they look at their alternatives in the fixed income markets and other areas where they invest, things don't look so rosy. So they're really paying up for real estate now, and that's what's driving price for the A-quality properties and you start moving away from the As and obviously the returns go up.
But one of the problems we're having right now in direct conversations with owners is an owner may own a B that could become a B+ or an A- but he sees the A pricing and he thinks he deserves A pricing and there's just not a deal to make. It's incredibly difficult right now.
Paul Morgan - Morgan Stanley
I mean, so you think basically we're back to a point where kind of these value-added stories are getting -- the seller is getting compensated for the upside.
Jeffrey Berkes
Well, I think that might be a good general conclusion, but what I tell you is that depends on the deal. And every deal is different at the level of risk that's associated and the amount of clarity that's associated with each of those value-add opportunities that's different.
So it is a little bit hard to be general in that respect.
Operator
Your next question comes from the line of Jeffrey Donnelly with Wells Fargo.
Jeffrey Donnelly - Wells Fargo Securities, LLC
A few questions. I guess, Don, if it's not a sort of done deal, why disclose El Segundo now?
And is there any opportunity to maybe partner up with a maybe a pension provider? I'm assuming you'd knock out some of your competition.
Donald Wood
I'm not going to address the last point there, Jeff, and we felt comfortable disclosing it now is really all I'll say on the first.
Jeffrey Donnelly - Wells Fargo Securities, LLC
Okay. And then just a few questions.
You have, I guess, a growing development/redevelopment pipeline. We've been asking about Chicago for years.
Any consideration of maybe selling those assets to recycle capital into that pipeline?
Donald Wood
Yes. There is -- we look at it asset by asset.
I guess you do know that we just sold Feasterville in Pennsylvania, and we are looking at selling one of the assets in Chicago, in fact. Just around the model?
Dawn Becker
[indiscernible]
Jeffrey Berkes
Yes, we are.
Donald Wood
So we're in the market now on one of them up in Lake Zurich, Northlake. But again, not particularly because of Chicago but because of what we see about with respect to the balance between what we can get paid for it and where we can reallocate the proceeds.
So the other assets we have in Chicago, boy, they're good assets, really good assets. And so it's a little tougher decision, depending upon where we can allocate proceeds, but the question's a really good question.
I mean, you will always see us balancing between in the way we deploy capital and deploying capital includes retrieving some of it back. So you're always going to see some assets for sale from us and these are the latest.
Jeffrey Donnelly - Wells Fargo Securities, LLC
And I'm not sure if you can really talk about it, but I believe in the Boston area, the Newbury line portfolio is out in the market. Is there any color you can share with that?
Or is that not something you can talk about now?
Donald Wood
Yes, it is out in the market and I don't think it's any secret that we'd love to own it. Whether we're going to be able to pay the price necessary to own that portfolio or not, I don't know.
But we'll certainly be active throughout that process. And I guess Jeff -- gosh -- Jeff Berkes, that process has a couple of months left in it?
Jeffrey Berkes
Yes, I would say a handful of weeks in the bidding process.
Jeffrey Donnelly - Wells Fargo Securities, LLC
And just 2 more, actually. Bala Cynwyd, I mean, someone mentioned in the redevelopment pipeline that you'd added some pad sites there.
I had been there recently. Is it fair to say that the grander redevelopment there is just off the table for a few years maybe because of local zoning conditions rather than market conditions?
Donald Wood
Yes, the local -- the big project is off the table for 5 or 7 years but it's not because of zoning. It's really because of NRDC buying Lord & Taylor back a few years ago.
I mean, you go back, it's Lord & Taylor that's on that site and they were paying a very low rent and it was a crummy store and the future of Lord & Taylor was not clear. NRDC and Richard Green buys that company -- They do a beautiful -- Richard Baker buys that company -- They do a beautiful job in kind of repositioning them and they really want that site.
We have adjusted the lease, so we've gotten a big piece of value from a big ramp up on that store. And they're going to put a few million dollars into the store.
So we look at that and say "Gosh, can we get paid for the site basically from the existing tenant and supplement it with additional pads around it for the next 5, 7, 10 years?" I'll do that all day long, way lower risk and great economics.
So that's why that's happened much more so than zoning related. I mean, zoning's a piece, it's -- that's timing.
But the new rent deal, Lord & Taylor, is in place today.
Jeffrey Donnelly - Wells Fargo Securities, LLC
And just last question, I think you're talking in Assembly Square about maybe tweaking the retail focus there to maybe have more of an outlook -- outlet alignment. Is that something you guys are seriously pursuing?
Or is it still up in the air?
Donald Wood
Oh, no, absolutely, I just talked about it in a couple of questions ago. There's no question that when you think about that -- when you think about what's happening at Assembly, you should envision outlets, restaurants, service, theater, [indiscernible] , people living on top.
And I mean, we're really excited about Assembly. I wish the first phase yield was going to be through the roof, if not, but it'll be okay and we'll make money down the road.
Operator
Your next question comes from the line of Alex Goldfarb with Sandler and Sons (sic) [Sandler O'Neill]
Alexander Goldfarb - Sandler O'Neill + Partners, L.P.
Sandler O'Neill. Don, just want to go back to your comments on the tenant activity, and I guess given your perspective that you guys have such a heavy D.C.
focus, and obviously, here in New York, we're biased by the headlines that we read. As you speak to your folks in the other markets, so particularly in the West Coast and both in San Francisco and down south of -- and even in Chicago, are there nuances that you hear, like, are the -- is it just sort of East Coast skittishness, and once you leave, maybe D.C.
New York, the other markets, you're not hearing that same skittishness? Or is that sort of pervasive across all your markets?
Donald Wood
No, I think that's very fair. We do have, 1/3 of our company is in D.C.
It's been the best place to do business just -- no matter who's in power or what the administration is working on, but there's no question that current talks make people say, "Oh my gosh, what's the impact going to be?" And much more so here, Alex.
Those talks are much more here in the East Coast than -- certainly than in California. But now when you kind of dig down into that a little bit, I got to tell you, short Washington D.C.
at your own peril. That's all I would say because, I mean, a big reason we've been able to raise this dividend for 44 years in a row, imagine what happened in Washington D.C.
And the portfolio even then -- even a bigger piece of the company, it's only 30% or so. Now it probably was half or more back then.
But think about 1976, 1992 and all the things that have happened over the period of time when we raise that dividend every single year. So with all the discussion of cutting back in Washington, a lot of it has to do with cutting back on growth rates, which I completely agree are not sustainable with respect to Washington.
But in the suburbs, where we're operating, it is -- all I would say is, short it at your own peril. I remain very, very bullish on this market.
Alexander Goldfarb - Sandler O'Neill + Partners, L.P.
So when your leasing guys are telling you about their pace of activity, the pace of activity remains healthy or has it slowed in any way that starts to make you concerned?
Donald Wood
I mean, look at my leasing guy and to what he says.
Chris Weilminster
Yes. My response to that is I think there's great caution amongst the retail community in looking at quality assets.
They want quality over quantity. And that's leading from our perspective that the optimism in our portfolio is up, and we were -- we're feeling bullish about tenants looking at our portfolio and considering our assets, so...
Donald Wood
If you look at what's happened in the last quarter in Washington D.C., we lead rent rollers in that market more than any other market, except for Santana Row.
Alexander Goldfarb - Sandler O'Neill + Partners, L.P.
Okay, so it sounds like it's safe to say that no one is holding up decisions. Maybe it's slowed down a little but people are still carrying through.
Is that fair?
Chris Weilminster
Yes.
Alexander Goldfarb - Sandler O'Neill + Partners, L.P.
Okay. Second question is, Assembly Row, there's obviously some government funds involved there.
Any other projects that you guys have that would require government funds? And then are you seeing any change in the way governments allocate capital?
Maybe they're deciding to favor more housing projects or school projects or versus commercial projects. Are you seeing any change in how they allocate those dollars?
Donald Wood
In order? No, there really aren't any other projects where a TIF or the government subsidy as part of it is a significant part of the economics of a project other than Assembly Square for us.
Though -- I say that in every single market that we try to build something in, we look for help from the local state, primarily governments, but we don't have any of that stuff going on right now other than Assembly. And so, really, my comments are really kind of they're skewed by what we found at Assembly.
And we have not seen a change in the type of projects that government's are looking at, but there's probably better people to ask than me.
Operator
Your next question comes from the line of R.J. Milligan with Raymond James.
R.J. Milligan - Raymond James & Associates, Inc.
Most of my questions have been answered, but looking at some of your competitors, they're pursuing more nonretail tenants for their traditional shopping centers. So I was wondering how aggressively you're looking at that option.
And two, just an update on your strategy to pursue the traditional mall and outlet center tenants.
Donald Wood
R.J., let me give you the first thing. First of all, everyone of us in this business tries to create demand as best we can over the supply.
Now you know and I know that the highest and best use of a retail center is for -- the objective is to get retail sales as high as you can because they feed on one another and allow you to pull rents. That's always, always, always the first thing that we're trying to do, great retailers that add to the balance of the center.
Now when there are no great retailers, you look for alternatives. And we have -- while we certainly have a couple of those locations in places where we'll look for nonretail users, that's a really small part of this portfolio because, what I said, we are trying to get retail sales up throughout a portfolio, and that's usually done much better with great retail tenants than with other uses.
What was the second part?
R.J. Milligan - Raymond James & Associates, Inc.
On the -- bringing the traditional mall and outlet center tenants into the shopping centers.
Donald Wood
Yes, yes, I mean, I spent a little bit of time on this last time. I called you about taking a guy out of GGP names Michael Khouri, who has turned into a real important part of the leasing team here.
We are absolutely having success from the standpoint of improving our relationships, getting relationships with mall and outlet tenants that we have not. I told you all about Assembly.
But on the mall side, meetings that we've -- frankly we haven't had before and lots of serious conversations about getting mall tenants into some of our properties. Now we've got 1 or 2 success stories, but I suspect in the next 12 months, I'll be able to tell you about some pretty good ones, pretty sizable ones.
R.J. Milligan - Raymond James & Associates, Inc.
Are they concentrated in any specific category? Or can you talk about which tenants...
Donald Wood
Not category as much as product, as much as retail types. So the Avenue at White Marsh, which we own more of a lifestyle center, for Pete's sake.
We're getting some great traction, if you will, on improving the merchandising base from talking to mall-side tenants. Bethesda Row.
Certainly, at Santana Row, you'll see it in -- certainly, you'll see it full blown at Assembly Square. So it is less the, as you would imagine, less the traditional gross [indiscernible] Stuff and more the higher end product that we have, especially the mixed-use product that we're having the most success in.
Operator
Your next question comes from the line of Christy McElroy with UBS.
Christy McElroy - UBS Investment Bank
What do you envision for the Border space at Santana Row given that it's a such a marquee space? And, Don, you talked about rolling rents up on -- potentially on the Borders and Blockbuster space.
But can you give sort of a better sense for the mark-to-market as well as the potential timing of re-leasing, given you've already had pretty extensive conversations with other retailers at this point?
Donald Wood
Yes, I think so. I mean, I don't want to give you the kind of -- there's absolutely a lead tenant at -- for the Border space at Santana that I'm just thrilled about if we can get the deal done.
But the deal is not done yet. It takes its time to go through the traps.
But on the 3 that are close today, which is Friendship, do we have a [indiscernible]?
Andrew Blocher
It's not signed yet, but [indiscernible].
Donald Wood
Okay, I'm really close, really close on one for the Friendship Center. The space that will be 20% better, frankly, than what was in there.
I mean, that's pretty darn strong. For Old Town, Los Gatos, we're going to break that space up a little bit.
It's 2-floor space so we'll break it up. The combination should provide us pretty good rent compared to what was there.
At Santana Row, I would expect to see a significant increase. So those are really good.
The fourth one, which is still operating, which is Wynnewood, we're just not as far in knowing how we're going to replace that one and that'll be closer to flat or maybe even down a little. But overall, I can't really give you a percentage yet but it's double digits.
Christy McElroy - UBS Investment Bank
And then the -- I think your -- the occupancy that you provided, your lease percentage, what's your physical occupancy at June 30? And would you anticipate that the gap between the leased percentage in the physical occupancy could potentially widen for a period of time as the Borders and Blockbuster space commences occupancy?
So basically, could there be a lag in revenues from the time that...
Donald Wood
Oh, absolutely, absolutely, because you're right on it. And I mean, we've got a physical occupancy [indiscernible].
Andrew Blocher
Yes, Christy, it's 92.7% physical occupancy as of June 30.
Christy McElroy - UBS Investment Bank
Okay, because I think you mentioned in your prior comments that the leased percentage from some of the space should start to pick up towards year end, and I'm wondering if maybe we'll see the revenue impact in 2012 instead.
Donald Wood
You'll see -- oh yes, it won't be '11. I mean, you'll see a little bit in '12 and you'll see a lot more in '13.
And there's no question there's a lag, no question at all. I mean, and what that -- it was not coincidental that I was talking about leased percentage.
Because what we do see -- we're in the middle of -- the amount of activity that's going on in Chris Weilminster's office and among his team right now is dramatically higher than it was 1 year ago. And that's all in getting deals done.
Now getting deals done, as you say, rightly put out, does not equate to rental income starting that day. And so there's clearly a lag.
That lag though will take, so you'll see -- I think you'll start to see an increasing leased percentage, but then the following increase in physical occupancy and, therefore, rent paying, following 6 months behind that.
Operator
Your next question comes from the line of Laura Clark with Green Street Advisors.
Laura Clark - Green Street Advisors, Inc.
It seems like that you're taking an increased look at California today. What is it about California that's attractive, especially given the specific economic issues at the state level?
Donald Wood
It's probably the specific economic issues at the state level. That makes it attractive at some respect.
And I only say that a little bit tongue-in-cheek. I mean, the bottom line is after going through the last 5 years, you'll never ever convince me that poor properties will -- are a better long-term investment than the better properties in the right locations.
I know we say that, I know it sounds like I'm talking my book, but I got to tell you, I believe that through and through. The long term, I would always -- I'm going long on both Northern and Southern California for the next decade and probably longer after that.
And so the fact that things are a little messed up today or a lot messed up, depending on your perspective within the fiscal situation of the state, is something that is kind of interesting but not particularly concerning long term from the standpoint of the type of real estate that we'll look at there. And when you look at something like a Santana Row or you look at something like a Third Street Promenade, it is very hard for us not to believe that those properties aren't going to be worth more, in fact, significantly more in the next decade.
And to the extent we can take a shot out of the properties like that, we would rather pay up on that than chase yields in a secondary market.
Operator
Your next question comes from the line of Steve Sakwa with ISI Group.
Steve Sakwa - ISI Group Inc.
Don, I just want to follow up, I wanted to see if I could get the full aggregate numbers. I think you talked about kind of acquisition costs, marketing costs, demo costs.
I guess it was being $0.02 last year or $0.06 greater this year. Do you have just the aggregate numbers?
Donald Wood
Well, definitely. Melissa or Andy can help you more, but $0.02 is $1.3 million and $0.06 is $3.7 million.
Andrew Blocher
Yes, Steve, they are basically dead on top of there.
Steve Sakwa - ISI Group Inc.
Okay. And how do see those trending, I guess, Don, as you kind of go into '12 and '13?
I mean, do those kind of stay flat and then tick down or they go higher before they go lower?
Donald Wood
They stay about flat in '12 and then they should go lower in '13. Now if they don't, it just means a lot of the great stuff, which I hope is the answer.
But the point I was really making, Steve, is, if you think about a steady-state of activity over some periods of times, yes, there's always variances where it's a little more, it's a little less. But 2011 activity over 2010 activity was so dramatically higher, such that I'm -- that I felt like I needed to say it.
For a bunch of years, I would never say because it's been about the same, a little bit lower certainly in '09 and '10 than in the other days, but not demonstrably. In '11 and '12 because of what's going on with the 2 particular big projects and some of the smaller ones.
It's just it's worth talking about. I wouldn't -- it almost has to be a peak in '11 and '12 being about the same and then being reduced after that because of the nature of -- the size and scope of Assembly and Mid-Pike.
Steve Sakwa - ISI Group Inc.
And just to be clear, these are all being expensed as opposed to capitalized, is that correct?
Donald Wood
That's right. That's what I'm saying, that they're hitting the P&L right now.
Steve Sakwa - ISI Group Inc.
Okay, okay. Could you just talk a little bit about the office space?
I know you had built some office space at Santana. And I'm just curious, it sounds like you've got more space to potentially build.
But how did that first building, I guess, up on Winchester, how was that leasing?
Donald Wood
It's leasing. I mean, where are we now, Dawn?
We're 3.5 of the floors that are done. I think we got a little bit left to go.
Those rents were far below where we had underwritten them in 2006. So we yield a 6 or so on the building.
And I -- certainly, I'd hope to yield an 8 or better. But no, the -- Silicon Valley, if you're concerned about -- and it's not just offices -- it's any type -- If you're concerned about certain markets, you should be very bullish about the valley for the next 2 or 3 or 4 years.
Job growth, lots and lots of good stuff coming out of the tech center.
Steve Sakwa - ISI Group Inc.
No, I was actually more on the positive side, thinking when would you start that next building. And was there enough demand?
And did the rents kind of make sense to start the next office building?
Donald Wood
Yes, that's a great question, and Jeff Berkes is going to answer that because we've been pushing on that.
Jeffrey Berkes
Yes, Steve, we're working through plans on another building. The rents aren't quite where they need to be, but everything's trending in the right direction.
And like Don said, we're seeing great job growth out here, and the job growth is really coming from the larger, better, capitalized revenue-generating, in most cases, profitable tech companies unlike the last cycle. And they're hiring a lot of people at high salary rates.
And we're going to continue to see that kind of trickle down through, not just office space, but hopefully restaurant sales or apartment rents and all that kind of stuff here in Santana. But we're not quite there on rents being at the place they need to be to pull the trigger on a new office building, getting close and headed in the right direction.
Steve Sakwa - ISI Group Inc.
I mean, are you greater than 10% away? Or would you say you're inside the 10%?
Jeffrey Berkes
It depends and it's a little bit hard to figure out right now because what's driving the market are the bigger users and the big blocks of space. If you follow the office market out here at all, the big blocks of space are rapidly disappearing.
And when there is a big requirement, what somebody will pay for the right space is a little bit up in the air. So plus or minus 10% is probably about right, but you don't really know until you're in the market.
Operator
Your next question comes from the line of Rich Moore with RBC Capital Markets.
Richard Moore - RBC Capital Markets, LLC
Andy, the first question I have for you is on the Borders that you lost in the second quarter and Blockbusters, I guess, as well, the timing of those -- when rents stopped on those, so that we can think about the impact on the third quarter?
Donald Wood
Yes, Rich, they will really to end at Q1.
Richard Moore - RBC Capital Markets, LLC
Okay. So they were in the entire second quarter -- or rather, they were out the entire second quarter?
Donald Wood
They were out. Out, correct.
Richard Moore - RBC Capital Markets, LLC
Yes, got you, got you. Okay, and then as far as the balance on the line of credit, is that something you'll pay down over time with the ATM, you think?
Or will you do something larger to term out that $200 million balance on line of credit?
Donald Wood
Yes. I mean, Rich, we got a couple of things.
I mean, Don talked about the acquisition, we want to see how that goes. We've done okay by waiting.
We've got both the fixed income and the equity markets open to us -- obviously, the equity markets are less open today than they were, say, 1 week ago. We feel like we're in a great position, which is we've got great access to capital.
We would certainly anticipate that we'd likely term out at least a portion of the line by year end but don't need to pick a direction right now.
Richard Moore - RBC Capital Markets, LLC
Okay. But you wouldn't try to do that with the ATM, right?
That's just not sufficient.
Donald Wood
But once again it depends on how...
Andrew Blocher
No, it's not sufficient, Rich.
Richard Moore - RBC Capital Markets, LLC
Yes, okay, I just want to make sure. And then also, I wanted to ask you, on the asset you got on Newbury Street or that you bought on Newbury Street this quarter, which one was that one?
Jeffrey Berkes
Rich, the address is 328 Newbury Street. It's on the last block, if you will, which is the block where you'd see a lot of the more fashion-forward and trendy retailers.
We bought with our operating partner, Taurus Urban Meritage, an 8,200 square foot building. And what's interesting about the deal during the -- during our due diligence period, our operating partner was able to negotiate a lease termination with a tenant that took a significant amount of the building in a below market rent and wasn't performing.
There's a couple other smaller tenants in there that have shorter term leases. So effectively, what we've got is a vacant single tenant building, which is one of the types of spaces that are most in demand for the cutting edge retailers who are out looking to fill the whole building.
So it will be a nice little acquisition.
Operator
Your next question comes from the line of Michael Mueller with JPMorgan.
Michael Mueller - JP Morgan Chase & Co
Just a quick question. What was the cap rate on the Feasterville sale?
Andrew Blocher
Low 7s, Mike.
Operator
Your next question comes from the line of Vincent Chao with Deutsche Bank.
Vincent Chao - Deutsche Bank AG
I know you don't really want to talk about El Segundo too much but, just I was just wondering, taking into account transaction costs and sort of the low -- and the price that you're going to have to pay to get a quality asset like that, I mean, should we expect must accretion in FFO if that deal were to close in year 1, I guess, in year 1.
Donald Wood
You should not expect accretion in year 1, you should expect accretion in beyond that.
Vincent Chao - Deutsche Bank AG
And then just on Assembly Row, I mean, I know the bids are still out there, so it's not completely finalized. But what's the remaining risk on that?
If the bids come in quite a bit higher than what the MTA's committed, I guess, that there was some chance that that wouldn't go forward, is that correct?
Donald Wood
Yes, no, there is -- I don't really know how to handicap that. I do believe there is still a risk of that.
I'd be crazy to say that, that can't happen given the work that's out there. I do think we've got the financing set up pretty darn well, so it's certainly not likely.
It's not remote either.
Vincent Chao - Deutsche Bank AG
Can you just remind us, though, what the MTA's commitment is, and then what would sort of make it maybe a question mark in your mind as far as the bids coming in?
Donald Wood
Yes, well, in total, Dawn, go through the numbers. What do we got?
Dawn Becker
In total, there's $50 million to $60 million of funding out there for the T-Stop. And the $50 million is the number we've got, we're shooting, for in terms of where a breakpoint might be for whether there's more money out there, hard to say or where we may go forward.
Vincent Chao - Deutsche Bank AG
Okay. But the yields that you're sure of showing in that 5% to 7% range assume the $50 million to $60 million.
Dawn Becker
It assumes the $50 million covers it, so that the fee is fully covered by the public funding available.
Operator
Your next question comes from the line of Nathan Isbee with Stifel.
Nathan Isbee - Stifel, Nicolaus & Co., Inc.
Could you just talk about El Segundo relative to the shops at Carlsbad in terms of...
Donald Wood
No, no, I'm not going to do that. I'm not going to do that now, Nate.
I'm really sorry but I'm going to put you off on that. And once we have this thing in better shape, I'll be able to do in as much time as you want, but I don't want to do a comparison on that property right now.
Nathan Isbee - Stifel, Nicolaus & Co., Inc.
Did you pursue that?
Donald Wood
We did.
Operator
At this time, sir, there are no further questions. You may continue.
Andrew Blocher
Thanks, everybody. We'll see you next quarter.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect your lines. Good day.